Economists Weigh In on Inequality and Inelasticity in San Francisco

Economists Weigh In on Inequality and Inelasticity in San Francisco

Last week, several economists weighed in on San Francisco’s housing affordability crisis, citing patterns that are all-too-familiar for those seeking YIMBY policies in the region.

Writing for the Huffington Post, USF international economist Bruce Wydick narrows down the central factors behind high demand in San Francisco real estate, and criticizes policy goals of local politicians in the “progressive” faction. 

The first economic factor is what he calls the “tractor beam,” a reciprocal growth in job sectors enabled by geographic proximity. UC Berkeley Enrico Moretti illustrates this in his book The New Geography of Jobs, and explains in this PBS segment how the regional housing shortage stifles wages amid the economic boom. To make a long story short, industry specialization and commensurate growth in local services creates what economists call “complementarities”—when jobs that are mutually helpful and “complementary” to each other can collaborate locally, regional productivity increases.

The next two factors are intertwined: Wydick calls them “the idea hatchery” and “the internet megaphone.” As high-skilled workers cluster in the Bay Area’s hypercompetitive technology sector, the proximity of “bright minds” generates a high concentration of innovative ideas within the region. Unfortunately, the internet’s ability to broadcast high-skilled labor globally increases the wages it can command, relative to low-wage laborers with less access to these global networks.

Wydick alludes to the fact that “market-rate” housing is not inherently “luxury”—it is by definition affordable to some consumers on the market. He calls for greater quantities of high-density apartment housing to be constructed with all deliberate speed, criticizing San Francisco’s “progressive” faction for ideological posturing that slows down this much-needed construction.

“There is no better solution for putting downward pressure on rents and home prices in cities like San Francisco than building large quantities of high-rise affordable housing near work sites and transit centers,” he writes. “But rather than seeing this as an environmentally friendly solution that would simultaneously reduce urban sprawl, traffic congestion, and put downward pressure on rents, so-called progressives chose to cast their lot against the ‘rich developers’ and city planners who have advocated this approach for decades.”

Why, then, is housing produced by the private market seen as a mere commodity for the wealthy?

Trulia’s economist Ralph McLaughlin may have some answers. In a recently published study, McLaughlin blames local bureaucracy rather than zoning regulations for the daunting gap between housing production and rising demand. His data shows that for every month added to the entitlement process, housing elasticity drops by 0.03 points.

An elasticity score of 1 means that for every 1% increase in housing prices, the locality increases its housing supply by 1% Las Vegas tops the list with an elasticity of 1.17. San Francisco scores near the bottom: 0.04. Only New Orleans scored lower in McLaughlin’s study.

We reported last week that Mayor Ed Lee vetoed the San Francisco Board of Supervisors’ resolution to oppose Governor Jerry Brown’s streamlining trailer bill, which would speed up the production of housing with “by-right” approval after meeting state and local requirements. Even before these publications, there have been similar conclusions reported by the Federal Reserve and UC Berkeley economists. It is perhaps with this in mind that Mayor Lee has joined the growing ranks of local government officials promoting the Governor’s bill.

 

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